Macroeconomics & International Finance Seminars

Spring 2017
Tuesday 1:40-3:00 PM
499 Engineering II

April 11
Betty Daniel, University of Albany-SUNY
"Why Don’t Rich Countries Default? Explaining Debt/GDP and Sovereign Debt Crises"
Host: Carl Walsh
Incentives for default are different for a rich sovereign than for a poor one. Rich countries have well-developed financial systems with government debt as a central anchor. Strategic default would destroy the assets and trust upon which the financial system is based, inflicting a massive punishment. We introduce a debt contract, which explicitly incorporates the different incentives faced by a rich sovereign. The implicit contract contains the threat of massive punishment for a sovereign who fails to pay what she is able, but no punishment, even in default, for a sovereign who pays what she is able. The central planner uses this debt contract to smooth consumption in the face of persistent output with stochastic shocks. We calibrate to the default experience of Greece in its 2010 debt crisis. This alternative debt contract can explain why: 1) countries with debt/GDP ratios higher than the value of standard default punishments do not default; 2) a sovereign in default always repays something; 3) crises follow an increase in debt which sometimes ends in a sudden stop; 4) debt becomes risky for different countries at different levels of debt/GDP; 5) haircuts and default duration are highly heterogeneous across default events.

April 18
Darrell Duffie, Stanford University
"Efficient Contracting in Network Financial Markets"
Host: Eric Aldrich
We model bargaining in over-the-counter network markets over the terms and prices of contracts. Of concern is whether bilateral non-cooperative bargaining is sufficient to achieve efficiency in this multilateral setting. For example, will market participants assign insolvency-based seniority in a socially efficient manner, or should bankruptcy laws override contractual terms with an automatic stay? We provide conditions under which bilateral bargaining over contingent contracts is efficient for a network of market participants. Examples include seniority assignment, close-out netting and collateral rights, secured debt liens, and leverage-based covenants. Given the ability to use covenants and other contingent contract terms, central market participants efficiently internalize the costs and benefits of their counterparties through the pricing of contracts. We provide counterexamples to efficiency for less contingent forms of bargaining coordination.

April 25
James Cloyne, UC Davis
"The Effect of House Prices on Household Borrowing: A New Approach"
Host: Hikaru Saijo
We investigate the effect of house prices on household borrowing using administrative mortgage data from the UK and a new empirical approach. The data contain household-level information on house prices and borrowing in a panel of homeowners, who refinance at regular and quasi-exogenous intervals. The data and setting allow us to develop an empirical approach that exploits house price variation coming from idiosyncratic and exogenous timing of refinance events around the Great Recession. We present two main results. First, there is a clear and robust effect of house prices on borrowing, but the responsiveness is smaller than recent US estimates. Second, the effect of house prices on borrowing can be explained largely by collateral effects. We study the collateral channel in two ways: through a multivariate heterogeneity analysis of proxies for collateral and wealth effects, and through a test that exploits interest rate notches that depend on housing collateral.

"The Politics of Sovereign Default Under Financial Integration"
Host: Grace Gu
In this paper we study the role of portfolio diversification on optimal default of sovereign debt in a two-country model with large economies that are financially integrated.  Financial integration increases the incentives to default not only because part of the defaulted debt is owned by foreigners (the standard redistribution channel), but also because the endogenous macroeconomic cost for the defaulting country is smaller when financial markets are integrated.  We show that the sovereign default of one country may be triggered by higher debt (liquidity) issued by other countries.  Because the macroeconomic costs of default spill to other countries, creditor countries may find it beneficial ex-post to bail-out debtor countries.  Although bailouts create moral hazard problems, they can be welfare improving also ex-ante.

May 2
Jonathan Wright, Johns Hopkins
Host: Eric Aldrich

May 16
Jim Nason, NC State University

May 25
Ivalina Kalcheva, UC Riverside
Host: Eric Aldrich

June 6
Bill Branch, UC Irvine
Host: Hikaru Saijo

Fall 2016
Tuesday 1:40-3:00 PM
499 Engineering II

Note different day/time: Thursday September 15, 2:00 - 3:30 pm

James Costain, Economist, Bank of Spain
"Fiscal Delegation in a Monetary Union: Instrument Assignment and Stabilization Properties"
Motivated by the failure of fiscal rules to eliminate deficit bias in Europe, this paper analyzes an alternative policy regime in which each member state government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation.
We compare long run debt accumulation and the response to public spending shocks in dynamic games representing several different institutional configurations, including a status quo monetary union scenario with many local governments, a monetary union with a single federal government, and various fiscal delegation scenarios, as well as a social planner's solution.
In our numerical simulations, delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable "austerity" when it responds to fiscal shocks.

October 11
Adrien Auclert, Stanford University
"Inequality and Aggregate Demand"
Host: Carl Walsh
Abstract: We explore the effects of transitory and persistent increases in income inequality on the level of economic activity in the context of a Bewley-Huggett-Aiyagari model in its Keynesian regime of constant real interest rates. A temporary rise in inequality lowers output modestly because the covariance between changes in income and marginal propensities to consume is negative but small in the model and the data. A permanent rise in inequality leads to a permanent Keynesian recession whose magnitude depends on the elasticity of aggregate savings to idiosyncratic uncertainty—a potentially much larger effect. Economic slumps create endogenous redistribution and give rise to an inequality multiplier. By reducing the marginal product of capital, they also lead to declines in investment that further amplify the recession. Government spending and public debt issuances are expansionary and crowd capital in. Our methodology separates sufficient statistics from general equilibrium multipliers and is applicable to the study of all macroeconomic models of aggregate demand.

October 18
Oscar Jorda, UC Davis / SF Fed
"Large and State-Dependent Effects of Quasi-Random Monetary Experiments"
Host: Ken Kletzer

October 25
Jennifer La'O, Columbia University
"Optimal Fiscal and Monetary Policy with Informational Frictions"
Host: Ajay Shenoy

November 8
Raul Tadle, UC Santa Cruz
"FOMC Sentiment Extraction and its Transmission to Financial Markets"
Host: Carl Walsh
Since 2005, the Federal Open Market Committee (FOMC) has regularly released its minutes three weeks after its meetings. Previous research has found that the volatility of different financial market returns react to these releases, and the nature of the reaction may depend on the information the minutes contain. In this paper, I use Automated Content Analysis adopted from computational linguistics and political science to derive sentiments acquired from these FOMC meeting documents. I assign an index to the minutes in order to determine if the sentiments obtained from the information therein can be classified as hawkish (analogous to improving economic conditions and inflationary concerns) or dovish (related to deteriorating economic outlook and subdued price changes). I compare the sentiments of the discussions in the minutes to the sentiments of information in corresponding FOMC statements released immediately after the meetings and calculate the surprise component of the relative sentiments. I then evaluate how this news shock in the minutes impacts broad equity and real estate investment trust indices as well as the exchange rate valuation of different world currencies against the U.S. Dollar. My findings indicate that financial assets respond to the minutes based on the type of news shock they contain and that financial markets react more significantly during the FOMC's implementation of date-based Forward Guidance.

November 15
Zach Bethune, University of Virginia
"Asset Supply and Private Information in Over-the Counter Markets"
Host: Carl Walsh
This paper studies asset issuance and trading dynamics in a decentralized market with incomplete information. New assets are issued in a primary market through efficient auctions and then trade amongst investors who have heterogeneous valuations in an over-the-counter (OTC) secondary market. The innovation regarding the OTC market literature is that, in all trades, investors’ valuations for the asset are private information. The innovation regarding the literature on trade under private information is that the distribution of investors’ valuations is endogenous—it depends on trading dynamics in the OTC secondary market. We calibrate the model to match features of the U.S. municipal bond market between 2005-2014 and examine the effects of private information on key financial market indicators such as trade volume, asset issuance, secondary market liquidity, and welfare.

November 29 *NOTE different time: 9:00AM*
Dirk Niepelt, University of Bern
"Domestic and External Debt and Default"
Host Carl Walsh
We develop a general equilibrium model with defaultable domestic and external debt. Overlapping generations work, consume, accumulate capital and public debt. Successive, democratically elected governments choose taxes, public goods spending, domestic and external debt issuance and repayment. In politico-economic equilibrium, inter generational conflict strengthens debt capacity and lowers the fundamental conflict between creditor groups. Default decisions may or may not be correlated across debt tranches. Minimum debt returns raise the cost of public funds ex post and render default on other tranches more likely; ex ante, they crowd out capital. Under standard functional form assumptions the model is solved in closed form. Demographic ageing increases domestic debt capacity but has only modest effects on external debt capacity. Equilibrium default offers risk sharing possibilities, but only for select types of shocks.

Winter 2017
Tuesday 1:30-3:00 PM
499 Engineering II

January 18 (Note different day)
Nelson Lind, UC San DIego
"Credit Regimes and the Seeds of Crisis"
Host: Hikaru Saijo
This paper presents a theory of mortgage credit that explains (1) the rise of non-prime lending during the early 2000’s, (2) the simultaneous housing boom, and (3) the subsequent crisis. The theory is built on rational and competitive behavior by lenders in response to asymmetric information about borrower income risk. Two possible credit regimes may arise. In the “screening” regime, lenders ration credit through documentation requirements (screening contracts) and down-payment requirements (separating contracts). In the alternative “pooling” regime, risky borrowers gain access to low-doc low-down mortgages (pooling contracts). Joint housing and mortgage market equilibrium implies a tipping point phenomenon — a fall in income risk can trigger the pooling regime, lead to a sudden fall in documentation requirements, and, due to an indifference condition switching effect, generate a rapid appreciation in home prices. A housing crisis follows this credit-fueled boom once fundamentals revert and the screening regime returns. The theory matches microeconomic evidence on the allocation of credit during the mid-2000’s, explains why mortgage rates fell relative to treasury yields during 2003, and provides a framework to assess policies intended to rule out future housing crises.

January 23 (Note different day)
Sanjay Singh, Brown University
"Output Hysteresis and Optimal Monetary Policy"
Host: Carl Walsh
We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. We incorporate Schumpeterian endogenous growth into a business cycle model with nominal rigidities. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing R&D and producing a permanent loss in output. Output hysteresis arises under a standard Taylor rule, but not under a strict inflation targeting rule when the nominal interest rate is away from the zero lower bound (ZLB). In a calibrated medium-scale DSGE model, we find that a ZLB episode lasting six quarters permanently reduces output by 2.70% relative to the deterministic trend. At the ZLB, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. However, it is optimal to deviate from the deterministic trend when the economy is hit by both TFP and demand shocks.

January 31
Caio, Machado
"Financial Crises, Coordination Failures and Disasters"
Host: Carl Walsh

February 1 (Note different day)
Leland Farmer
"The Discretization Filter: A Simple Way to Estimate Nonlinear State Space Models"
Host: Hikaru Saijo

February 28 (Note different time and location - 3:30 - 5:00 pm, E2, room 180)
John C. Williams, Federal Reserve Bank of San Francisco
"Measuring the Natural Rate of Interest: International Trends and Determinants"
Host: Carl Walsh
U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies –Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

March 7
Gregor Jarosch, Stanford University
"Intermediation as Rent Extraction"
Host: Carl Walsh
This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agents' decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency.